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'Frothy' assets spark concerns as cash floods India markets
[MUMBAI] From officials of India's central bank and the market regulator to fund managers, people are fretting over elevated asset prices.
The nation's equities and bonds have rallied even as economic growth sags to its weakest since 2014, and earnings remain stubbornly weak. The reason: a surge in local flows after last year's cash ban and buoyant global markets.
This divergence is spiking valuations and inciting caution among the authorities and strategists. Michael Patra, a member of the Reserve Bank of India's rate-setting panel, described the conditions as "frothy and bubbly" in the minutes of last month's meeting. Gurumoorthy Mahalingam, a board member at the Securities & Exchange Board of India, said on Sept 6 that large inflows need calibration at a time when the rupee is strengthening.
"The combination of high valuations in equity and fixed-income markets, an appreciating currency and the persistence of a liquidity overhang in the money market is a perfect recipe for a financial imbalance," Mr Patra was quoted as saying.
The expansion in a developing-nation's stocks is backed by an increase in company earnings. The outlook for Indian businesses, though, has been muddied by the slowdown in growth caused partly by the cash ban and the disruption triggered by the new sales tax introduced on July 1.
Earnings per share growth at Nifty members will settle at "mid-single digits" in the year to March, versus consensus expectations of 11 per cent, Credit Suisse Securities India Ltd's equity strategist Neelkanth Mishra said in Mumbai last week. Projections of a 23 per cent rise for the next fiscal year may see "harsher cuts", he said.
Despite the earnings decay, the Nifty's estimated price-earnings ratio is almost two standard deviations above the 10-year mean. The last time the ratio was that high, at the start of the global financial crisis in 2008, the gauge had its worst annual decline on record.
Strong flows have kept multiples elevated and made it hard for managers to spot winners. Local funds bought a net US$11.5 billion of shares so far this year, exceeding the all-time high purchases of US$11 billion in 2015. Foreigners have ploughed US$6.8 billion into equities and bought US$23 billion of debt since Jan. 1.
"We've seen micro cap-oriented funds closing subscription, which highlights that there is overvaluation in the segment," said Harsha Upadhyaya, chief investment officer for equity at Kotak Mahindra Asset Management Co.
Investors have embraced financial assets with gusto after the currency ban took the shine off property and gold. Stock funds took in a record 203 billion rupees (S$4.3 billion) in August, data from the AMFI show. Funds that hold both equities and bonds got 389 billion rupees in the first five months of the year that began April 1, four times more than in the year-earlier period.
In debt, relatively higher real yields have drawn global investors. The nation's 10-year sovereign bond yields 6.60 per cent, the most among major Asian markets. "This means in India investors are getting decent compensation beyond inflation protection," said Vivek Rajpal, rates strategist at Nomura Holdings Inc in Singapore.
Foreigners have lapped up all available limits for corporate debt, driving down yields on top-rated 10-year bonds nearly 70 basis points from the year's peak seen in May.